Russia's Challenges in the 1990s

An interview with Martin Gilman of the IMF, Washington Profile
News Agency, 3 December 2002

What were the main issues/problems the IMF had to deal with in
Russia?

The main problem Russia faced in trying to pursue good economic
policies at the time of the collapse of the Soviet system was to
develop the human and administrative capacity to be able to formulate
and implement economic decisions.

It sounds almost trivial to say that; however, if we at the IMF and
others in the international community had understood and realized how
significant a problem that would be, I think we would have designed
our policy and our technical assistance in a rather different way. I
say that because one of the prejudices that many observers of the
West, even well-informed observers, believed that if there was one
attribute you could say with confidence about the Soviet Union, it was
the prevalence of centralized economy. It was, after all, an
autocratic society, some would say a totalitarian state. And therefore
centralized authority was its key feature. It was a belief by all
observers outside of Russia that this dominant central authority
survived the collapse of the Soviet system, because it was such a
well-developed feature of the system, it had been in place for so many
years, and even in post-Soviet Russia in 1992-93, you still had the
attributes of central authority—a President, the Ministries,
etc.

And even in the discussions in 1992 we thought we were dealing with a
normal government going through dramatic changes, that we were dealing
with new authority but in a country that had institutions that could
develop and implement policies. I think it was only with hindsight
that we gradually came to understand that there was a real central
power vacuum, and this was not only a contradiction to observers who
believed the function of the central government continued, but it was
also ironic, in the sense that we all thought that the real legacy of
the Soviet time was the continuation of central authority.

But the CPSU was the central authority, and when it disappeared there
was nothing else, there was just a skeleton, so it looked like a
government structure, but the real power of decision-making, for
resolving disputes and reaching compromises and making decisions, was
not there. There was a formal government structure that had no way of
making decisions. And it took a long time to develop the workings of a
normal government.

I remember that Oleg Vyugin, who is now the chairman of the Central
Bank and had been involved in all of the discussions, was explaining
to me that a valuable lesson was conferred by the work with the IMF,
which is that if Russia was going to be able to have a modern state
that could actually resolve economic problems, there had to be
coordination in the various factions of government. He said that for
Russian bureaucrats this was not obvious, it was simply not obvious
how government worked, and one of the key contributions of IMF was not
the money, and not even necessarily the specific advice on budgetary
policy, but it was advice on how government works, although that
wasn’t our intention. Had we understood what the real issue was,
we would have focused our advice in a different way. In retrospect,
it's very revealing how many times we in the IMF expected that the
Russian government would implement decisions to deal with various
problems—the banking system, taxation, lack of fiscal
revenue. And we kept believing that the government was sincere in
wanting to tackle these problems and yet time after time we kept
seeing that these policies were never really implemented as agreed, or
implemented poorly.

The whole opening of the GKO market to non-residents in 1996 was
intended to provide the government with a deep and broad financial
capital market to lower the yield so that it could have access to less
expensive capital. But it was all predicated on the idea that the
budget was going to be brought under the control, and that the EFF
(extended fund facility) had negotiated with the Russian government in
1996 was based on the fact the central government deficit was going to
decline to 4% in 1996, and 3% by 1998, and in fact it never happened,
because the expenditures continued to increase, particularly because
of the unfortunate but necessary policy of sequestration. After the
presidential election, the great shock to the financial elite in
Moscow was that in Sept 1996 cash revenues collected by the federal
government fell to an all-time low. It was not even enough to cover
the monthly wage bill for the power ministries. People came back from
their dachas and found the situation was even worse than before the
elections. And then, to announce publicly that you would be going
after the ten largest tax delinquents by a particular date—the
end of 1996—and then to do nothing, was so counterproductive it
would have been better to do nothing at all, rather than pronounce
very publicly an empty promise. But the problem we found is that the
ability to actually develop and then implement policies just
wasn’t there, the bureaucracy didn’t respond. When
Mr. Putin was elected president in March 2000, we had understood from
his staff that he wanted to send a strong signal of what kind of
orientation his administration would have. And he realized that the
time between his inauguration and the end of the spring Duma session
was too short to table new legislation that could have a dramatic
effect. So he with his advisors looked at what pending legislation
there was that he could back that would send a signal of his
intentions, and he decided to back the non-agricultural land-cove and
issued a prikaz that the government should do everything possible to
make sure this was voted into law before the end of the spring
session. As you know, it took another year—it was only voted
into law in July 2001. And the analogy that Mr. Voloshin gave me
about the presidential prikaz was, he said “It was like pouring
water into sand.” In other words, even a presidential
instruction on something that has already been prepared—it just
disappeared, because the ability to coordinate inside government was
not there.

I say this to underscore the huge challenge that post-Soviet
authorities have faced in trying to fund the right people to bring
into government, to adopt the right kind of structures for decision
making, and they had to do it not only in a vacuum created by the
collapse of the CPSU, but also in a time of economic chaos, when a lot
of the Soviet legislation did not apply to a market economy, at a time
of great disruption. And I think it's remarkable that as one looks
to the end of the 1990s, so much progress has been
made—inflation was brought under control, the ruble was
stabilized, the government actually started collecting money. The
legislation has started to have a real impact.

How influential was the IMF in Russian policy-making during
the 1990s?

Our role was really very marginal in influencing what happened in
Russia. Michel Camdessus said to me “What happened in Russia in
the 1990s was 99% Russia, 1% IMF.” He said that even the 1
percent probably shouldn’t have been that much, it should have
been more the World Bank, which was better equipped to deal with major
structural and administrative change, but that's the way the world
was in the 1990s. In all countries it's always the authorities of
the countries that make decisions, whether you’re talking about
Argentina today or Indonesia several years ago. In a sense, Russia
was not different from those cases. The only thing is that Russia is a
very special country, for geopolitical and historical reasons, and the
IMF could try to educate and advise and influence a little, but Vyugin
was probably right—the IMF's biggest contribution was
getting Russian senior advisors to understand that they had to
coordinate if they wanted to transform the post-Soviet system into a
modern state.

IMF's biggest influence was probably in the crisis of
1998—all the senior officials were worried, and yet they were
convinced that you could not devalue the ruble, sometimes for
political reasons, sometimes for monetary control reasons. If you
don’t have the right people—and I’m not going to
name names—if you don’t have the people to carry out
so-called emergency policies in a crisis environment, the markets are
simply not going to believe it. Not only the international markets,
but your own bankers are not going to believe that the government has
a credible policy that will lead to financial stability. As one
London-based investor said to me: “When you’re lending to
the government, you have to be confident that the government is going
to generate the revenues to repay you. Once that confidence has
eroded, no one will want to buy your government papers.”

What is the level of professionalism in Russian government
today?

I can’t address the situation as of right now, but I could say
that it has been very difficult for the government to find a staff,
middle and senior positions, and even throughout the bureaucracy, and
I suspect that this is still a major problem. Throughout the world,
especially in times of economic crisis, governments have a difficult
time recruiting very good people into service. In Russia though,
it's even more difficult, because the private sector attracted the
young people who had managerial and entrepreneurial skills, the very
people that the government desperately needs. They either went to the
private sector, or found jobs abroad. The fact is, it's very
difficult to attract people because of salary levels, and there is
still very antiquated restrictive practices for employment in
government surveillance that discouraged people—the Official
Secrets Act, which is very ambiguous in today's Russia and makes a
civil servant vulnerable to what could be fairly arbitrary
administrative procedures. There is always the concern that you
don’t have security of employment, particularly at the senior
levels. It's a very difficult situation, at least it was during
the period I was familiar with, to recruit young talent, and I think
that what is needed is a genuine civil service reform. My own view has
always been that the hope for Russia depends on a long time scale, one
that will take generational changes. That's why, as I said
earlier, I am somewhat impressed with the efforts of the Putin
administration in trying to address these issues. In my last
discussion with Kasyanov last year, he was saying that personnel
issues take up the vast majority of his time—conflicts between
ministers etc. In the functioning of a modern state, the prime
minister shouldn’t have to do so much of that.

Martin Gilman was the International Monetary Fund's Senior
Resident Advisor in Moscow from 1997 to 2002. He is currently the
Assistant Director of IMF Policy Development and Review Department in
Washington DC.